Lesson 3

Question 1

1.1 Define an income replacement plan

Answer 1

Protects against loss of income in the event of absence from work as a result of illness or injury regardless of the cause.

There is a continuum ranging from coverage for occasional to short term to long term absences

Question 2

1.2 Contrast the level of income protection provided by sick leave plans and salary continuance plans in the event of absence from work due to an illness or injury

Answer 2

Sick leave plans provide full pay for a short period (a few days to 2 weeks or longer)

Salary continuance plans are for a period of short term disability up to the end of the elimination period for long term disability plans.

The plan member usually receives a full salary for a specified number of weeks which may be followed by a lower percentage of salary for the balance of the short term disability period

Question 3

2.1 Explain why integration of government sponsored benefits with group benefits is an important plan design consideration

Answer 3

It is important to integrate government sponsored plans in the design of group benefit plans from a co-ordination of benefits perspective.

Coordination is needed to ensure that benefits paid don’t exceed the disabled member’s normal pre-disability income and serve as a disincentive to return to work

Question 4

2.1.b list the main sources of short term income replacement benefits (3 employer 3 government)

Answer 4

• sick leave
• salary continuance
• weekly indemnity/ short-term disability (WI/STD)

government
- EI
- Workers comp
CPP/QPP

Question 5

2.2.a Describe the basic characteristics of Workers Comp

Answer 5

benefits are provided for work related injury and illness.

Tax free benefits from the date of disability to the date of return to work

Question 6

2.2.b Describe the basic characteristics of EI

Answer 6

Illness and injury don’t need to be work related

taxable benefits start after one week and are payable for up to 15 weeks

55% of maximum weekly insurable earnings

individuals must meet requirements regarding work history and EI contributions

Question 7

2.2.c Describe the basic characteristics of CPP/QPP income replacement benetifs

Answer 7

Only available if disability is severe and prolonged.

Taxable benefits start after four months and are payable until CPP/QPP retirement benefits begin.

Benefits are available for claimants and dependent children

Must meet eligibility requirements

Question 8

3.1 Describe the level of income protection provided by a group sick leave plan

Answer 8

Group sick leave plans typically provide full pay less deductions for income tax CPP/QPP contributions, EI premiums, and union dues for absence from work for a short period caused by illness or injury

Question 9

3.2 Explain the differences between informal sick leave plans and formal sick leave plans

Answer 9

Informal:

• not documented in a formal policy
• difficult to define the classes of group members they apply to or extent of benefits
• Adjudication of claims is minimal and a doctors note may be required

Formal:

• More common in public sector
• described in the employment agreement or outlined in policy
• little uniformity in plan design with the exception of plans offered by plan sponsors in the same industry and geographic location

Question 10

3.3 Outline 8 factors a plan sponsor considers when designing a sick leave policy

Answer 10

1) Number of days of leave granted each year to various classes of plan members
2) Whether new plan members must complete a minimum service period before becoming eligible for sick leave
3) When leave is granted on a calendar year basis how much sick leave is given to a member hired mid year
4) what, when and how frequently evidence is required for injury or illness
5) whether sick leave is available for non emergency doctor or dentist visits
6) How many unused sick days can be carried over to the next calendar year
7) The amount payable during sick leave
8) How to notify the plan sponsor in the event sick leave is required by a plan member

Question 11

3.4.a List three kinds of sick leave plans subject to accounting standards in sections 3462 and 3463 - Employee Future Benefits of the CICA handbook or the IAS 19. For each list when that type of plan is except from the accounting standards.

Answer 11

1) Sick leave plans that vest when the right to receive the benefit is no longer conditional on employment. Unused sick days may be paid out at the end of employment. A plan is exempt if no payment of any kind is made when the plan member terminates employment or retires.
2) Sick leave plans that accumulate beyond 12 months after the plan sponsor’s fiscal year (ie days can be carried forward to one or more periods after the one in which they were earned. A plan is exempt if it includes an annual buyback provision or if the unused sick leave can only be carried forward one year.
3) Sick leave plans that accumulate and are paid without illness related . This includes plans that allow members to use their unused sick days immediately prior to retirement and plans that allow a cash payment to be made to buyback at any time. These plans don’t have an exemption and must be accounted for on an accrual basis.

Question 12

3.5 Describe the considerations a plan sponsor must account for when deciding on the number of days that can be accumulated in a sick leave policy (3)

Answer 12

1) If the max number is too low the plan won’t protect a member who has a lengthy but temporary disability
2) If the max is too high member may view them as extra vacation days and casual absenteeism may be encouraged
3) Sick day entitlement that accumulates beyond 12 months may created a large unfunded liabilty

Question 13

3.6 Explain how plan design can be used to manage absenteeism, unused entitlements and the cost of sick leave plans

Answer 13

An effective plan design coordinates between sick leave, STD and LTD.

LTD plans have an elimination period during which pay comes from EI, WI/STD or salary continuance.

Such a combination makes it feasible to limit the accumulation of sick days to a reasonable maximum and minimize accounting liabilities

Question 14

4.1 Outline the characteristics of a salary continuance plan (6)

Answer 14

1) cover only salaried employees and pays benefits through payroll
2) usually have minimum adjudication, often a doctor’s note is sufficient documentation and no documentation is required for absences of less than three days
3) Often informal
4) Often a cost effective alternative to insurer administered plans. However with privacy legislation and the increasing complexity of adjudicating claims more plan sponsors are using third party services to help administer and adjudicate disability claims.
5) usually provide benefits for the entire LTD elimination period.
6) generally benefit schedules are tiered. Full salary paid for a number of weeks followed by a lower percentage of salary for the balance of the STD period. Tiers may or may not be service related

Question 15

4.2 Outline factors a plan sponsor considers when designing a salary continuance plan (8)

Answer 15

1) Number of weeks of salary continuance granted
2) Various classes of plan members covered by the plan
3) The service requirement thresholds for progressively longer periods of full salary of the benefit level is service related
4) The benefit level after a plan member has utilized full entitlement at 100% of salary
5) The provision of evidence of illness or injury, what is needed, when and how frequently
6) The availability of paid leave for nonemergency doctor or dentist appointments
7) The method of notifying the plan sponsor in the event salary continuance is required by a plan member.
8) The effect of a recurrent disability for the same or related causes on a plan member’s benefit entitlement

Question 16

5.1.a Describe WI/STD plans (4)

Answer 16

1) formal income replacement plans that typically have a waiting period of 3-7 days from illness and the first day of injury due to accident or hospitalization.
2) most plans pay a percentage of earnings around 60/67% and have a maximum weekly benefit amount.
3) most plans have a max benefit period of 17 or 26 weeks. although some hourly plans may have maximum benefit periods of 52 weeks or more
4) may be self insured or insured. Self insures plans are typically paid through payroll

Question 17

5.1.b Identify the key distinction between WI/STD plans and sick leave plans

Answer 17

A third party administrator is often involved in WI/STD plans.

The degree of involvement can change ranging from claims adjudication only to full administration

Question 18

5.2.a List three options available to employers for integration of WI/STD plans with EI sickness

Answer 18

1) nonintegrated
2) Sickness Supplementary unemployment benefit (SUB)
3) Carve out or wrap around

Question 19

5.2.b Which option for integration between EI sickness and WI/STD results in a EI premium reduction

Answer 19

Nonintegrated plan if the benefit amount is at least 55% of the member’s insurable earnings

Question 20

5.2.c Describe a nonintegrated WI/STD plan

Answer 20

The WI/STD is not reduced if the individual is receiving EI benefits. EI is the second payer

Question 21

5.2.d. Describe a SUB plan

Answer 21

A Sickness Supplementary unemployment benefit tops up EI sickness benefits

Question 22

5.2.e Describe an integrated (carve out or wrap around) WI/STD plan

Answer 22

Pays benefits before and after EI. However a carve out plan pays during EI eligibility period if EI is declined whereas wrap around does not.

Question 23

5.3 Explain why it is more advantageous for a plan member to receive sickness benefits from a WI/STD plan than EI (3)

Answer 23

WI/STD usually includes special benefits (sickness, pregnancy/parental leave)

EI usage may reduce future eligibility

If a plan member is still unable to work at the end of WI/STD benefits they may apply for EI

Question 24

5.4 What is the usual definition of disability in WI/STD plans

Answer 24

If the member is unable to perform any or all aspects of their occupation due solely to accidental injury or illness

Common practice is to look at ability to perform essential aspects of the job

Usually subject to other requirements such as not being employed in any other work for remuneration and being under the care of a physician

Question 25

5.5 Discuss factors that impact the length of the elimination period in a WI/STD plan

Answer 25

Usually depends on whether the disability is due to injury or illness and whether or not the member is confined to a hospital

Question 26

5.6 Explain the reasoning behind having an elimination period before STD/WI benefits begin (3)

Answer 26

To avoid inefficiencies in paying for an absence of a week or less

Discourages casual applications for minor concerns

Ensures that the plan operates as an insurance plan with claims dollars directed towards income losses that individuals cannot afford

Question 27

5.7 Describe factors that influence the benefit amount provided by WI/STD plans

Answer 27

Usually 80-85% of net earnings.

Usually a percent of pre-disability earnings.

For union or hourly workers there may be a schedule based on weekly earnings ranges or positions classifications or a flat dollar amount per week.

The benefit is rarely related to the plan member’s length of service.

Question 28

5.8 Explain thy tax status of the WI/STD benefit is an important consideration

Answer 28

Unless the plan member is paying the entire premium the benefit is taxable.

To provide a comparable level of income replacement after tax a WI/STD plan that is taxable should be based on a higher percentage of the member’s gross earnings than a non taxable plan`

Question 29

5.9 Explain why integrating WI/STD with CPP/QPP is not a critical consideration

Answer 29

Integration is done with the goal of not exceeding regular income levels while on disability.

The benefit period duration for CPP/QPP is short and integration is not necessary when benefits are less than 17 weeks since CPP/QPP benefits don’t begin until the 4th month of disability

Question 30

5.10 Explain how WI/STD benefits are integrated with WC benefits

Answer 30

WI/STD pay on a non-occupational basis, those plans that cover occupational injuries usually are integrated with WC.

The usual result is that no benefits are paid from the STD plan since the minimum temporary disability from WC is usually greater than the STD plan

Question 31

5.11 Explain how a plan member’s elimination period for benefits is determined where a STD plan is integrated with sick leave

Answer 31

In this case each member’s elimination period is determined to be the greater of the plan’s elimination period or the member’s accumulated sick days

Question 32

5.12 Explain how successive periods of disability are usually treated under WI/STD plans

Answer 32

If from the same cause they are usually considered a single period of disability unless they are separated by a specified period of time - usually 2 weeks - of regular work.

If from different causes they are usually considered a single period unless separated by a return to work (usually only one day will suffice)

Question 33

5.13 List the types of exclusions and limitations usually included in WI/STD plans - when no benefits are payable (8)

Answer 33

1) for any period the claimant is not under the care of a physician
2) for any period the claimant is engaged in any occupation for remuneration or profit except as approved by the insurer (for rehabilitation purposes)
3) For any period the claimant is receiving EI maternity or parental benefits
4) For any period during a strike or the scheduled duration of a leave of absence or layoff if a disability commenced after the beginning of a strike, leave of absence or layoff
5) For any period the claimant is confined in a penal institution or correctional facility
6) For a disability resulting from participation in an insurrection or riot or in the commission of, or attempt to commit, and criminal offence
7) For a disability suffered as a result of an act of war, whether declared or undeclared
8) For disabilities resulting from an internationally self inflicted injury or attempted suicide while sane or insane

Question 34

5.14.a Describe the general approach to funding WI/STD for small groups (<150 lives)

Answer 34

Usually a nonrefund accounting basis.

Either fully pooled or prospectively rated.

With such a small spread of risk these groups aren’t suitable for any form of aggressive risk sharing or for self insurance

Question 35

5.14.b Describe the general approach to funding WI/STD for midsized groups (150-500 lives)

Answer 35

May be insured on a nonrefund accounting basis and prospectively rated.

Or the plan sponsor and insurer may accept some risk sharing as provided in a refund accounting basis

Question 36

5.14.c Describe the general approach to funding WI/STD for large groups

Answer 36

More likely to self insure, possibly using an administrative services only (ASO) arrangement.

However since benefits paid in a self insured WI/STD plan are subject to payroll taxes, an increasing number of plan sponsors are changing from self-insured to insured refund accounting arrangements

Question 37

5.15 Which accounting regulations apply to WI/STD plans (3)

Answer 37

Postemployment benefits under sections 3462 and 3463 Employee Future benefits of the CICA handbook and IAS 19 Employee benefits for publicly traded companies include WI/STD plans

Question 38

5.15 Outline the accounting requirements that apply to WI/STD plans that aren’t service related

Answer 38

In most plans the benefit is earned and paid within 12 months so no actuarial valuation of liability is required.

If the plans aren’t service related a liability equal to the present value of the expected future payments must be recognized at the plan sponsor’s measurement date if there are plan members receiving the benefits, unless the significant risks have been transferred to an insurer through an insurance arrangement.

If the significant risks have been transferred, the liability is limited to any outstanding premiums at that time.

If the significant risks haven’t been transferred a liability is inclu

Question 39

5.15 Outline the accounting requirements that apply to WI/STD plans that are service related

Answer 39

If any benefits from these plans are service-related (rare for WI/STD plans), the
accounting standards require accrual of the liability over the plan member’s service
with the plan sponsor, similar to that for defined benefit pension plans.

The accrual period of the liability (known as the “attribution period”) generally starts at the date of hire and ends at the expected date the plan member becomes entitled to receive benefits.

If the significant risks have been transferred to an insurer, the liability is limited to any outstanding premiums at that time (if they were being paid over time).

A yearly renewable term contract does not transfer the significant risks of a service-related plan, since the insurance premiums only provide sufficient funds to pay the claims incurred during the current year.

Question 40

6.1 Explain how IT 428 Wage loss replacement plans defines a wage loss replacement plan

Answer 40

A wage loss replacement plan is any arrangement between an employer and employees (or a group/association) of employees) under which provision is made for indemnification of an employee, by way of benefits payable on a periodic basis if an employee suffers a loss of income as a consequence of sickness, maternity or accident.

This may be formal or informal.

Question 41

6.2 Explain what portion of a disabled plan member’s benefits is deemed taxable income if a WI/STD plan requires member premiums

Answer 41

Equal to the total benefit received from the plan less the sum of contributions made by plan members since December 31, 1967 and for which deductions have not previously been taken.

Question 42

6.3 Explain the clarification provided by IT-428 Wage loss replacement plans with respect to EI premium reduction

Answer 42

A wage loss replacement plan may qualify the employer for a reduction in EI premiums.

5/12ths of any such reduction must be used by the employer for the benefit of its employees.

This benefit may be directly passed on by the employer, indirectly through an employees’ health and welfare trust or in any other manner but it will only be tax free in an employee’s hands if it is given in the form of a benefit that is specifically exempt